Frontier Seismic Survey Raises Prospect For Increased Fuel Security

Mongolia | Oil & Gas | Wed Sep 18, 2013

BMI View : A 2-D seismic survey planned across two frontier blocks in western Mongolia could support an increase in domestic oil production if exploration proves successful . Should the planned construction of the country's first refinery occur, a boost in domestic production would contribute to the country's efforts to reduce its heavy and pricey dependence on imports of R ussian refined products .

Petro Matad has awardedthe Mongolian geophysicalcontracting company Khet Co., Ltd the contract for the acquisition of 200km of 2D seismic on Blocks IV and V, inwestern Mongolia. The seismic survey is planned to commence in October 2013and is expected to take around six weeks to complete.

The seismic shootis designed to provide detailed coverage of two prospectiveareaspreviouslyidentified as promising by earlier seismicwork. PetroMatadhopes that the survey will confirm at least twodrillable prospects for acampaignplannedin 2014.

Frontier Seismic Survey Raises Prospect For Increased Fuel Security

Mongolia | Oil & Gas | Wed Sep 18, 2013

BMI View : A 2-D seismic survey planned across two frontier blocks in western Mongolia could support an increase in domestic oil production if exploration proves successful . Should the planned construction of the country's first refinery occur, a boost in domestic production would contribute to the country's efforts to reduce its heavy and pricey dependence on imports of R ussian refined products .

Petro Matad has awardedthe Mongolian geophysicalcontracting company Khet Co., Ltd the contract for the acquisition of 200km of 2D seismic on Blocks IV and V, inwestern Mongolia. The seismic survey is planned to commence in October 2013and is expected to take around six weeks to complete.

The seismic shootis designed to provide detailed coverage of two prospectiveareaspreviouslyidentified as promising by earlier seismicwork. PetroMatadhopes that the survey will confirm at least twodrillable prospects for acampaignplannedin 2014.

Promising Frontier Exploration Opportunity

To date, there has been no drilling in similar basins in Mongolia. Drilling has been contained to thesouth and thewest of the country.

The company is optimistic as the potential of thetwo Western Mongolianblocks.Commenting on theseismicprogramme,PetroMatad'sexplorationdirectorRidvanKarpuzhighlightedthat the geology ofwestern Mongolia is similar to thatoftheJunggarandTurpanbasinsinthe Xinjiang province of China, along thesouth-western border with Mongolia. According to previous work, thetwo Chinesebasins have been identified as structural and depositional analogues tothe twowesternMongolianblocks.

This could be promising for this frontier play, as both theJunggarandTurpanbasinscurrently produce sizable amounts of hydrocarbons.For example theJunggarBasin produced 221,507 barrels per day of oil (b/d)in 2012and recent discoveries in the areaindicatethe high potential of gas in theJunggarBasin.In addition, the basinis believed to hold sizeable shale oilresources, some11.9bnbarrels (bbl)according to the US Energy Information Administration (EIA). In an assessment,the EIA deemedthe basin ashaving the 'best shale geology' in China, due to the 'favourably simple' structural geology of the basin compared to other shale formations in the country.

Based on previous in-house basin modelling work,PetroMatadsuggests the presenceofapetroleum system for Blocks IV and V, called theSyn-Rift petroleum systemwhich passes withinthe two blocks. The company estimated that theSyn-Rift petroleum system itselfcouldhold some1.7bn bblofoil in place.Postulate

Reducing Dependence On Imports From Russia

Should a discovery be made, this could boost Mongolia's fuel security. Mongolia's economy had been experiencing considerable economic growth in the past years: the country's real GDP growth reached 12.3% in 2012, and our country risk team forecasts the economy will continue to grow strongly in the medium-term. In addition, the growth of the mining industry and an increasing population in Mongolia is expected to further fuel an increase in demand for refined products.

Booming Economic Growth

Mongolia Real GDP Growth (% change year-on-year), 2010-2018

Total consumption in 2012 was 23,300b/d according to EIA data, increasing at an annual average of 5% since 2002. Mongolian 2012 production only reached 9,900b/d. However, the country currently lacks any domestic refining capacity. As a result, crude produced domestically is exported, largely to China, and refined products are imported at a higher price. Mongolia meets the majority of its fuel requirement through imports from the following countries: Russia (90%), China (4%) and Kazakhstan (4%).

In January 2013, Toyo Engineering Corp reached a final investment decision to build Mongolia's first refinery, with completion targeted for 2015. The plant will have the capacity to produce more than 40,000b/d. At that level, output would meet the entirety of domestic demand ( see, 'Moving Toward Domestic Refining', December 5 2011).

In March 2013, the Mongolian government announced that the country has made an agreement with PetroChina to exchange crude oil produced in Mongolia with refined products, in order to reduce dependence on imports of fuel of Russia. At the time, it was stated that imports would begin shortly and would reach 4,880b/d by September.

In June 2013, Mongolia-based coal and oil trader HBOil decided to extend its exploration and production operations into North Korea. Producing oil and importing fuel products from North Korea would further diversify its sources of fuels ( see, 'HBOil Takes North Korean Gamble', June 3 2013).

Increasing domestic production is therefore onlyone ofthe ways in which Mongolia is trying to diversify its supply sources.The seismic shoot inthe twofrontierwestern Mongolian blocksraises the prospectsof increasingMongolia's domesticproduction.Further upside toMongolia'soil sector stems fromother exploratory efforts in the country, such as Wolf 'songoingpetroleum2D seismic survey at itsSukhbaatarblock, scheduled for completion in September 2013.Should the planned construction of the refinery in Mongoliacome online, increasing the country's domestic resource baseand production will beacrucialcomponent in reducingimport dependence andthe impact ofhighimport prices.